Transcript Economic Growth

ECONOMIC GROWTH
ECONOMIC GROWTH
 Growth
= Annual Growth Rate of p c
Income, GDP
 Growth

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
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
Rates across the world 65 – 95:
“spectaculat”: China (8.2 %)
“very good”: East Asia (5.5 %)
“decent”: South East Asia
“bad”: Latin America
“very bad”: Sub Saharan Africa
MODERN ECONOMIC GROWTH : BASIC
FEATURES
Today a growth rate of 2% is no surprise!
 Leaders over past four centuries:

1580 – 1820: Netherlands 0.2% (real p c GDP
growth),
 1820 – 1890: U.K. 1.2 % (annual growth of GDP),
 1890 – 1989: U. S. 2.2 % (average annual growth
rate).
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With a 2% rate, nation’s pc GDP doubles in 35
years => shorter than a life span!
THEORIES OF ECONOMIC GROWTH


Economic growth is the result of abstention from
current consumption.
Economy produces variety of products =>
production generates income => Income buys
these commodities produced (depending on
distribution of income and preferences).
CIRCULAR FLOW OF ECONOMIC ACTIVITY
outflow
Firms
Wages, Profits,
Rents
inflow
inflow
investmen
t
Consumption
Expenditure
Households
outflow
savings
TWO GROUPS OF COMMODITIES
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Consumption Goods: Produced for the purpose of
satisfying human needs and preferences =>
Households buy
Capital Goods: Produced for the purpose of
producing other commodities => Firms buy
SAVING - INVESTMENT

If all income is paid out to households, and if
households spend their income on consumption
goods, where doest the market for capital goods
come from?

Households save, by abstaining from current
consumption, households make available pool of
loanable funds that firms use to buy capital goods.

Buying power is channeled from savers to investors
through banks, individual loans, governments, and
stock markets.
STARTING POINT OF ALL OF THE THEORY
OF ECONOMIC GROWTH:


Without the initial availability of savings, it
would not be possible to invest and there would
be no expansion!
Macroeconomic Balance:

Investment Demand = Savings Leakage
SAVING & INVESTMENT

Households’ Choice
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Households receive income Y, can either save or consume, i.e.

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Firms’ Choice

Firms produce a set of goods worth Y, these are either
investment or consumption goods, i.e.
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Y=C+S
Y=C+I
Households and Firms in a Closed Economy

In a closed economy, the value of savings equals the value of
investment
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Y=C+I
Y = C + S => S = I
KEY DEFINITION: INVESTMENT
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Investment: Change in Capital Stock
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I(t)= K(t) – K(t-1)
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Intangible vs. Tangible objects that contributes to increased
production.

Human Capital: Act of training and education

Change in Capital Stock occurs because of :
Deliberate actions of firms, i.e. Purchase of new capital goods, sale
of old capital goods
 Depreciation, i.e. Natural wear and tear


Economic Growth is positive when investment exceeds
the amount necessary to replace depreciated capital,
thereby allowing the next period’s cycle to recur on a
larger scale => Economy expands!
THE HARROD – DOMAR MODEL -1-
THE HARROD – DOMAR MODEL -2-
THE HARROD – DOMAR MODEL -3-
Recipe:
Growth pc = (savings rate/ capital output ratio)
- population growth rate - depreciation
THE HARROD – DOMAR MODEL -4-